April 23, 2007 – Assessing the value of a H-D store

April 23, 2007

DENVER — In today’s acquisitions, the value of a Harley-Davidson dealership is directly tied to the amount of revenue a buyer believes they can make in the near future.
If the price of a H-D dealership is not more than three times the buyer’s anticipated forward earnings — the perceived cash flow for the next three years — than they should be eager to close a deal.
For the seller, if that amount is at least six times greater than the current dealer’s past-year earnings, then they should seriously consider taking that deal.
That was the message at the Harley-Davidson Dealership Sale and Acquisition Conference, an event moderated by Ed Lemco, who has had a role in a number of such deals as a consultant and a buyer.
“The importance (of the offer) isn’t what the past dealer made, it’s what you can raise revenue-wise in the future,” Lemco told an audience of 40-50 H-D dealership operators, sellers and buyers.
Whether it’s because of an aging dealership demographic or “because things have gotten tough, more people want to sell” their dealerships now than in the past, said Lemco, who through his Motorcycle Industry Consulting Services company has been part of 11 acquisitions in the past two years, and three in the past 30 days alone.
H-D stores generally have a higher value than metric stores, with an average H-D dealership going for $5 million to $6 million, Lemco said.
In such deals, the buyer should “set the point of negotiation,” Lemco said. “In the world of commerce and mergers and acquisitions in other industries, that’s how it is done.”
That initial offer, however, doesn’t come until after the buyer has considered a range of factors, including if the dealership is in the right market, if it’s in an adequate facility that is approved by the Harley-Davidson Motor Co., and an evaluation of the current staff. With that knowledge, the buyer then looks at the dealer’s earnings and evaluates how they could improve upon that in a five-year cycle. The first year of that projected forward earnings, according to H-D guidelines, has to assume the buyer will make the same amount as the current dealer did the previous year, Lemco said.
The projected forward earnings, Lemco said, is the key to the offer amount, not trivial matters like an inventory of the parts department. He also said that he typically does not negotiate on the price of the real estate — leaving that to be professionally appraised — or the new and used vehicle inventory, which “are outside the (offer) equation because that typically can be floored so it doesn’t require cash to buy it.”
As a seller, Lemco said “we have to be able to get you six times trailing earnings or more.” Otherwise, “it doesn’t make sense to sell because by the time you pay the taxes, it’s just not going to cash out enough.”
On the buyer’s side, Lemco advises not paying more than 3-31?2 times the forward earnings, noting that some exceptionally good H-D markets might require four times.
“If you pay more than that, you won’t be able to cover the debt service,” Lemco said, also noting that “personally, I wouldn’t invest in a store that required four times forward earnings.”
Lemco noted buyers can get up to 75 percent of the total cost of the H-D dealership financed.
Relying on improving a dealership’s gross profit in order to make money on an acquisition is not a new concept, said Clark Vitulli, the former CEO of America’s Powersports, the second largest dealership group in the United States, who attended the Denver event.
“That’s how we bought 17 stores at APS when I was there,” said Vitulli, who is now actively seeking to buy a H-D franchise. “If we didn’t believe that we could do better than the selling dealer, we wouldn’t have made an offer to buy those stores in the first place.”
Vitulli said principally there is no difference between the acquisition process for a metric or H-D dealership. “The process is identical,” he said, noting in each case the buyer needs to find a dealer willing to sell at an appropriate price in a market they’re comfortable with. Perhaps the biggest difference in metric vs. H-D dealerships, Vitulli said, is each of the metric brands is different in how they conduct their business.
Getting into a H-D dealership can be more difficult, Vitulli says. H-D’s buying guidelines are typically stricter and the cost of the stores often are higher. Plus, Vitulli has noticed that H-D tends to allow successful first-time dealers to open second and third stores, where some metric brands prefer to encourage competition between stores by bringing in different dealership owners.
Vitulli also believes, although he hasn’t seen any data to back it up, that H-D owners tend to own their stores for a longer period of time.
Many H-D acquisitions are done through corporate stock purchases because of the amount of money in taxes that a seller could potentially save. James Krendl, an attorney who has worked on numerous dealership acquisitions, provided a scenario where a seller, who had set up his dealership as a corporation, could lose more than
50 percent of a $10 million deal in taxes.
That’s why taxes — or ways to lessen their impact — can play a pivotal role in negotiations.
Krendl did serve a warning in regard to purchasing corporations.
“When you buy a corporation, you buy the whole package: assets and liabilities,” Krendl said. “It doesn’t matter, for example, whether you know if a liability exists. When you buy the corporation, you buy whatever is there and that means you could buy yourself a lawsuit from an employee or an unhappy customer. Anything that corporation has as a problem is going to be yours.”
But, as Krendl said, “that’s what you have lawyers for.”
Protection from potential liability issues can come both on the front end — where lawyers can look for any current lawsuits or tax return issues — and after the sale by holding back a percentage of the total cost of the sale to deal with such matters.
Although there is some risk to such deals, Krendl noted that he has done hundreds of acquisitions and “less than 1 percent end up in litigation.” psb